Your Money: Four tips for novice stock market investors

June 04, 2021 2:00 AM

A good company can still be a bad investment if you pay too much for it

Many traders do not want to take this effort and that is why they underperform and lose money due to trading without research and analysis.

By Gaurav Soni

Trading in the stock market is a high-risk game. New investors are many times disappointed when their purchase value drops. The common mistakes that people commit include averaging positions, trying to outsmart the market, over trading to recover losses and focusing too much on hot tips, etc.

Here are some points that can help you when investing in the stock markets.

Learn to self-trade
It is quite simple to get a relentless flow of tips on trading but very hard to make money on these tips. The best way to succeed in trading is by learning to self-trade. It is impossible to make money by listening to tips and titbits from friends or TV. You need to work on charts, understand structures and learn to put your own trades independently. Many traders do not want to take this effort and that is why they underperform and lose money due to trading without research and analysis.

Diversify, but don’t over-diversify
The goal with a diversified portfolio is to include various industries and categories that react differently from each other. This way it helps reduce risk, especially long-term. Portfolio diversification is very important as it helps us to minimise our non-market risk.

Non-market risk is something that an investor can control unlike market risk. Non-market risk is directly linked to the company’s performance, while market risk is linked to macro events like recessions, changes in interest rate, natural disasters, etc.

Invest in good companies
Invest in companies with a strong business model that preferably earn recurring profits and have a dominant market position. They make good returns on equity with little debt and generate strong cash flows that allow them to return excess money to shareholders as dividends. Investing in a good company also depends a lot on getting a good price. A good company can still be a bad investment if you pay too much for it — that’s one of the most common ways people keep losing money in the stock market. So never overpay for a stock.

Focus on being right
Showing your emotions and being human can be a great thing. But with investing, emotions tend to create costly mistakes that drive bad decisions. There is a subtle difference between being right and being in the money.

Source: Tax Guru

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